Hedge funds are asking for a tool to stop another LendingClub disaster -- this company is building it

A US company building a verification tool for peer-to-peer loans to make sure the people behind them are genuine has seen a spike in demand from banks and hedge funds to use the product, which has yet to fully launch, in the wake of the ousting of LendingClub’s CEO over doctored loan data.

Global Debt Registry (GDR), founded in 2006, provides third-party, independent verification of consumer loan data for banks and other lenders. It is currently piloting a tool that provides the same service for marketplace and other online loans.

Marketplace lending refers to platforms like LendingClub and Prosper in the US and Funding Circle and RateSetter in the UK, which directly matches savers who want to lend money with borrowers online. These platforms underwrite the loans but do not take any balance sheet risk themselves.

After they are made, the loans are securitized — packaged up and sold on to third parties like banks and third parties that want the regular cashflow of repayments — although this is not yet common in the UK. Currently, US institutions that are buying these securitized loans generally have to take it on the word of platforms selling them that the packages they are getting are all correct.

GDR CEO and Executive Chairman Mark Parsells told BI: “The industry standard of verification is having loan data provided by the marketplace lender. They will get a spreadsheet of those same loans with key loan information, also from the platform.

“They then get an independent third party to validate key data points from that. The problem with that is even though it is independent and a third party, it is not using independent data sources. Where a marketplace lender is using credit data from Experian, we will go to Experian and validate key information.”

“Is Oscar real? Does his security number match his name? Is he on a bankruptcy list? For us, first we’re validating our people, then we’re validating the credit.”

GDR began developing its tool to check online loan data at source 9 months ago. Parsells says: “Our private equity investor had approached us and said a number of hedge funds are purchasing loans and they’re interested in Global Debt Registry somehow coming into the space to help provide independent transparency.”

Parsell says GDR had 3 major US marketplace lenders and one major warehouse lender signed up to pilot its new tool prior to LendingClub’s crisis last month.

Since then, he says: “Across the ecosystem, since the Lending Club issue there’s been a lot more inbound calls. What I can say is almost all the players saw the need to this prior to that. I just think there’s probably a little bit more urgency to see this kind of solution put in place.”

Parsells says: “Whenever there are a whole new bunch of companies, complications arise. Whether it’s outright fraud or just mistakes. If all loans were independently certified up front, this kind of thing would eliminate fraud very, very quickly and we could identify operation issues very proactively.”

However, Parsells says he can’t guarantee that GDR’s tool would have spotted LendingClub’s doctored numbers. He says: “The thing that happened with Lending Club is loans came up on the platform and the borrowers were requesting funds. They sat on the platform for a long time, they were having trouble getting money. The access date was changed to make them look more recent.

“I don’t think anybody had contemplated that type of misstep, prior to that occurring. Our technology could easily track that but it would require complete and total commitment from the players in the industry and I don’t see that happening right now.”

GDR’s tool tracks loan data at 3 points — when loans are first made, when they are securitized and sold on, and as part of on-going portfolio monitoring for the institutions that buy them. Parsells says GDR plans to pilot its validation tool for the next few months and fully launch in the third quarter of the year.